What Is CAGR? How to Calculate and Use It (With Examples)

CAGR — Compound Annual Growth Rate — tells you the steady yearly growth rate that would take a value from where it started to where it ended. It is the most useful single number for comparing investments, business revenue or anything that grows over several years.

The formula

Example 1: an investment that doubled

You invested ₹1,00,000 and six years later it is worth ₹2,00,000. CAGR = (2,00,000 ÷ 1,00,000)^(1/6) − 1 = 2^(0.1667) − 1 ≈ 12.25% per year.

This matches the well-known "rule of 72": at about 12% a year, money doubles in roughly 72 ÷ 12 = 6 years.

Example 2: business revenue

A small business grew revenue from ₹50,000 a month to ₹1,20,000 a month over 5 years. CAGR = (1,20,000 ÷ 50,000)^(1/5) − 1 = 2.4^(0.2) − 1 ≈ 19.1% per year.

Why CAGR beats "average return"

Suppose an investment goes up 50% one year and down 50% the next. The simple average return is 0%, which sounds like you broke even. In reality ₹100 became ₹150 and then ₹75 — you lost 25%. CAGR captures this: (75 ÷ 100)^(1/2) − 1 ≈ −13.4% per year.

Limits of CAGR

• It hides volatility. Two funds with the same 12% CAGR may have had very different ups and downs.
• It only uses the start and end points. Choosing a different start year can change it a lot.
• It does not work for regular investments like SIPs, where money goes in at different times. For SIPs, use XIRR instead.